The CFPB’s New “Mortgage Tool” is a near miss

CFPB Clark Kent/SupermanThe Consumer Financial Protection Bureau (CFPB), has recently released a suite of tools for consumers who are thinking about buying a home. The concept is good; in my 25 years as a mortgage lender, I have spent a great deal of time educating the public about basic financial principles.

Here’s where CFPB has missed the mark: one of the tools they provide is called “Check interest rates for your situation.” CFPB claims, “Our data comes from actual lenders and is updated every day.” The user enters a loan amount, down payment, state and credit score and will see a range of interest rates and the number of lenders in the survey offering those rates.

This sounds like a good idea, but it misses the mark in a couple of important areas. The data CFPB delivers with their well-intentioned site can be misleading.

First, the rates generated are (I presume) APRs, which are very different from the note rate. This is because discount points, paid up front to reduce the interest rate, are part of the APR calculation. Here’s what I mean:

A $400,000 mortgage at 3.625% and no discount points will carry an APR of around 3.689%.

The borrower could get the same mortgage with an APR of 3.309% (note rate 3.25%)—but they’d pay 2.8% of the loan amount to get that rate. CFPB’s model doesn’t consider this.

They also disregard the potential cost of mortgage insurance. A buyer with a credit score of 740 and a down payment of 10% will pay mortgage insurance of .44%. That would amount to $132 a month. A buyer with a 680 score would pay $171 for insurance on the same loan.

Furthermore, they don’t take into account many other factors that affect interest rate: is the loan for a purchase or refinance? Is the borrower taking cash out? Will they have an impound account? All will affect the cost of the loan.

CFPB suggests that the consumer should negotiate with three lenders or more, getting Good Faith Estimates from each one, then using those documents as a negotiating tool. There are two problems with this: first, the GFE is not a useful consumer document. It does not itemize the actual costs of the loan paid by the borrower. Second, under the current Dodd/Frank regulations, lenders cannot do ad-hoc price reductions for individual borrowers. This is true for brokers and direct lenders as well.

Finally, the comparison tool (although it is a good start) disregards other costs and fees that can change from one lender to the next. Lenders with the lowest price (like on-line call-center mortgage brokers) often have other costs and fees that are not reflected in the GFE.

What is useful in CFPB’s mortgage tool is the credit score slider. All lenders use “risk-based pricing” today. This means that a borrower with a lower credit score will pay a higher rate than one with a higher score. We have seen many instances where raising a borrower’s FICO score by just 5 points has saved literally thousands of dollars on their loan.

In fairness, the mortgage tool is a Beta version. This means they recognize it as a work in progress. Still, with the complexity of the mortgage process, the fact remains that the best way to decide on the best mortgage choice for you is an experienced, trusted mortgage advisor.

I happen to know one of those guys.

 

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Will changing mortgage insurance fix FHA?

FHA vs Conventional dilemmaFHA loans are about to get a little less unattractive (yes, I know that’s a double negative. I did it on purpose).

Since 1934, millions of people have become homeowners because of the Federal Housing Administration’s (FHA) loan programs. The combination of low down payment requirements (presently 3.5%) and flexible underwriting standards has made FHA a very attractive program to many.

FHA insures these low down payment loans by collecting mortgage insurance, paid in an up-front premium added to the loan balance, plus a monthly premium. This money goes into a fund to pay claims to lenders as required.

Since the housing crisis, however, with its epidemic of foreclosures, the insurance fund has shrunk to dangerous levels. FHA’s response has been to increase cost of its mortgage insurance; at present, the initial premium is 1.75% of the base loan amount, added to the loan. The monthly premium is 1.35%. This means that buying a home for $300,000 would require a cash down payment of $10,500 (3.5%) and an up-front MI premium of $5,066. The total loan amount would be $294,500.

Interest rates for FHA are lower than for conventional loans; today’s rate for an FHA loan would be 3.375%, while an equivalent conventional loan would likely carry a rate of 3.75%.

A conventional loan would require mortgage insurance, as well. Depending on the buyer’s credit score, the monthly premium would be between $270 and $370 per month for the conventional loan. FHA’s premium would be $331. The payment for that $300,000 home would be $2,060 with an FHA loan, $2,044 for a 97% conventional.

Yesterday, Julian Castro, the secretary of the Department of Housing and Urban Development, announced that FHA would cut its monthly MI premium by .5%, to .85%. This will reduce the monthly payment on a $300,000 home to $1,940—a drop of $120 a month.

While this will enable FHA to regain some of the market share it has lost to conventional loans, it doesn’t address the real problem: the mortgage insurance stays in place for the life of the loan. The only way to get rid of it is to refinance and pay it off. By contrast, a borrower can eliminate private mortgage insurance (PMI) once equity reaches 20%. Assuming a modest 4% appreciation rate, that will take about three years. Then, the conventional mortgage will be quite a lot cheaper than the FHA version: $1,775 per month instead of $1,940—$163 less each month.

There are some other variables, like credit scores, that can make an FHA loan a reasonable choice. Any buyer should do a careful comparison of all possible scenarios before committing to either one.

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The real story about mortgage rates

You already know rates are low. Here’s how low they are today, how they got that way, and what you should do now.

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Sorry, Mr. Bernanke; your loan is denied.

bernanke sad“My loan is WHAT?” The voice on the other end of the line was shrill—very different from the measured tones most of us had heard from the Chairman of the Federal Reserve, the central bank of the United States of America. I had taken a loan application from former Chairman Ben Shalom Bernanke. He had sent me his bank statements, tax returns for 2012 and 2013, copies of driver’s licenses for him and Anna, his wife. He wanted to refinance his three-bedroom home on Capitol Hill. He had applied for a new loan of $625,000.

“I’m sorry, Ben,” I said. I felt like a big shot, calling a guy who had been one of the most powerful men on the planet by his first name. “You were a W-2 employee at the Federal Reserve for eleven years, but you went self employed in February, when you handed the keys to Janet Yellen.”

“Do you have any idea how much they pay me to give a speech?” he said. “I get a quarter of a million bucks just to stand up and run my mouth for half an hour! I’ve done six so far this year, and my agent has me booked through all of next year. I’m doing much better than the $200k I made at the Fed! So what’s the problem?” I could hear his exasperation.

“Here’s the problem,” I said. “You’ve only recently become self employed, and you’ve moved from being an economist and banker to being a professional speaker and consultant. As far as the lender is concerned, you’re now in a different line of work. It doesn’t matter how much you’re making; as far as they’re concerned, your income from speaking, plus the million-dollar book advance you got, not to be income that is likely to continue. I’m sorry, but that’s going to be the same with any lender.” I heard a loud sigh from his end, then a muttered imprecation.

“So there’s no way to do this?”

“Well, we could do an ‘asset depletion’ loan. I’m sure you have plenty of liquid assets. The only problem is that it’s a lot more expensive than a standard Fannie Mae-Freddie Mac loan. Or you could wait until next year, send me your 2014 tax return and go on that.”

“I’ll pass on that,” he said. “I think I know how I can make this work for me anyway.” I expressed my disappointment at not being able to help him and we said our cordial good-byes.

The next day, I saw headlines all over the media:

FORMER FED CHIEF DENIED MORTGAGE. BLAMES OVER-REGULATION.

I got an email invitation from him the same day. Did I want to attend his next speech? His topic, which was getting a lot of attention, was this:

“How excessive regulation is keeping qualified borrowers out of the market”

After the press coverage he had gotten after having his mortgage application denied, he was speaking to sellout crowds.

That Ben: lands on his feet every time.

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Staying Safe on the Long Run (Chronicles of Running)

distance runningAll runners know that the foundation of training for a distance event like the marathon–and shorter distances as well–is the Long Run. “If you want to run fast, run far” is the time-honored advice.

Two Sundays ago, as I set off on my then-longest run of 8.6 miles, those words resounded in my brain as I struggled through the last two miles of my Long Run. I had planned to cover the distance in just under two hours, but found myself still plodding along after 2 hours, 20 minutes. As I gratefully turned the corner to my own street, I saw my wife pulling out of the driveway.

“I was coming to find you,” she said, more than a little irritated. “I didn’t know whether you’d been hit by a car or had a heart attack!” I realized that her concerns weren’t just the alarmist concerns of a non-running spouse; there is indeed a lot that can go wrong on the Long Run.

It occurred to me that I should have done two things to ease her concerns in advance. First, I should have shown her my planned route. I am not one of those runners who sets out without a plan. I always know where and how far I plan to run, and what my pace should be.

The second thing I should have done (and always will do in the future) was to give her a way to track my location in real time. Fortunately, this is trivially easy to do. There is a useful (and free) app on my phone called Life360. Once I enable “Location Sharing,” anyone I’ve added to my Circle can see exactly where I am.

This does wonders for peace of mind.

There are so many things that can go wrong when we are racking up our miles–and since distance running is so often a solitary undertaking, giving people who care about us a way to know we are safe is an important consideration. Any time I get into a small airplane, I file a flight plan so others know where I am. It makes sense.

Today, as I came to the end of a 10.75 mile run, my wife was in the driveway, cheering me. “I watched you turn the corner on my phone!” she said. “I got lunch ready for you.”

Now I file a “run plan” when I set out, and turn on Life360.

It makes sense.

Disclosure: I have received no compensation from Life360, and one of its key employees happens to be my daughter. The app is free, easy to use and takes up very little space on my phone. You should get it for your Android,  Windows or iPhone.

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FHA Mortgage—The Wrong Choice?

real-estate-seesawThe venerable FHA loan has been an important path to home ownership for moderate-income buyers since 1934, when it came into being as part of the National Housing Act. Since that time, some 35 million families have used the federally insured mortgage program to become homeowners with very small down payments.

FHA became even more prominent in the recent crisis, as loans for borrowers with lower credit scores disappeared overnight. As the country lurched out of the Great Recession, FHA found that their insurance pool to cover foreclosure losses was drying up. They decided that increasing the insurance premiums would be the best way to replenish it and preserve the program.

FHA’s mortgage insurance premiums have been marching higher for several years. At present, there is an initial premium of 1.75% added to the “base” loan amount, plus 1.35% paid monthly. For a $300,000 purchase, this amounts to $5,066 initially, and $331 paid monthly. Although it was once possible to eliminate the insurance after about 10 years, FHA mortgage insurance is now permanent. The only way to remove it is to refinance into a conventional loan.

Even though interest rates for FHA loans are lower than for conventional mortgages, they are still a very costly option for most homeowners. A buyer with a credit score of 720 will get a conventional mortgage at a rate of around 4.5% (no points). With a down payment of 5%, that borrower can expect a monthly mortgage insurance premium of $270 (.69%)—and the lender will allow the insurance to be canceled once the loan reaches 80% of the home’s value. If the property appreciated at 4% per year, the buyer would be able to drop the mortgage insurance in less than three years.

The FHA loan would have a slightly lower interest rate—3.75% with no discount points—but the buyer would add the $5,066 initial premium to the loan, in addition to paying a monthly premium of $331. The buyer with a conventional loan will pay only slightly more initially:

MI compareEven though the conventional payment is $107.00 higher, the buyer will be able to drop the mortgage insurance within two or three years, depending on appreciation. Once that happens, the difference is significant: while the FHA buyer will be saddled with costly mortgage insurance for as long as he has the loan, the conventional buyer’s payment will drop to $1,444—$252 lower than for FHA.

An FHA loan is useful in certain cases. There are adjustments to the rate for lower FICO scores, so a buyer whose credit scores show some battle scars may still be better off with the government insured program. There may also be those who are struggling just to save the 3.5% down payment. For those hopeful buyers, the additional 1.5% in down payment could be a major hurdle.

Still, every buyer entering the market should be aware of the real cost difference between FHA and conventional loans. Saving up the additional 1.5% down payment could be a good investment.

 

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Getting Real (Chronicles of Running)

roger and me

Roger and Me. That’s Roger Bannister on the left, crossing the line in under 4 minutes for the mile. That’s me on the right, 55 seconds slower–and 9 years after his historic run.

Years ago, as I was embarking on a selling career, I learned that success involved setting goals—audacious ones. Even possibly unattainable ones. A “goal” that was like an Easy A class wouldn’t count; there has to be the real possibility of failure.

I learned that this goal (sometimes called a BFHAG, for Big Fat Hairy Audacious Goal) had to be specific. It also had to be written down and consulted regularly.

One more thing: you had to make it public. You couldn’t just put your goal on a post-it and stick it under your blotter. You had to open yourself not only to the possibility of failure but of public failure. Where the mind (and legs) feel like quitting, the ego may carry us through.

People who know me are aware of my rekindled passion for running. I have mentioned to some friends that I have been considering the commemoration of my 70th birthday next year (gulp) by running a marathon. That’s a little jaunt of 26 miles, 385 yards, kids. If I hit my goal time, that means putting one foot ahead of another without stopping for 4 hours, 25 minutes.

The goal has been somewhat nebulous up to now; my birthday is March 20th, and there are plenty of races in 2015. Maybe next October? November? That’s a LONG way away.

Except: Modesto. March 29, 2015. The date is right. There are no hills. The weather will be perfect. I have time to train—7 months.

There are no excuses—so Modesto it is. Now all my thousands hundreds several fans and followers know it, too.

Oh, and I almost forgot to mention: it’s a sanctioned Boston Qualifier race. That means if I hit my goal time (4:25), I’d be eligible to enter the most revered race of all: Boston.

Sh*t’s getting REAL now.

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A Minor Improvement in FHA Mortgages

HUD-FHA logo

FHA loans are about to get a tiny bit less expensive

The FHA loan program has been in existence since 1934. It provides government support for low to moderate-income borrowers to buy homes, offering small down payments (currently 3.5%), low interest rates and flexible underwriting standards.

These attractive features come with a price, however. The higher risk associated with the small down payment makes mortgage insurance a necessity. The borrower pays the premiums in two ways. The up-front premium, 1.75% of the base loan amount, is added to the loan. Thus, a buyer paying 3.5% down for a $300,000 home will have a $294,566 loan amount—98.2% of the purchase price.

FHA also charges a monthly renewal of 1.35%. This would amount to $325/mo for the $300,000 purchase. This is more expensive than the private mortgage insurance (PMI) charged on low down payment conventional loans. Conventional PMI for a 95% loan would cost between $128 and $273, depending of credit score. Moreover, the FHA insurance will be in place over the life of the loan. Lenders will cancel PMI once the loan to value ratio drops to 78%, based on the market value of the property.

There is another, rather sneaky cost to FHA loans. When the borrower pays off an FHA loan, whether by refinancing or by selling, the FHA lender charges interest after the payoff, to the end of the month. If you are paying off a $260,000 FHA loan with a 4.5% rate, you’ll pay a full month’s interest even if you pay the loan off on the first day of the month. That interest would amount to around $975. Conventional lenders charge interest on a per diem basis—a significant absence of rip-off.

There’s some good news on the horizon for FHA borrowers. HUD has just issued a new directive stating that these “post-payoff” charges are no longer allowed; as of January 21, 2015, lenders will charge only for the days the borrower has the money. Paying off that $260,000 loan on the second of the month will involve $65.00 in interest—not $975.

This will ultimately save consumers millions of dollars—and that is quite a “minor” improvement.

CORRECTION: My good friend, Doug Adamczyk, pointed out to me that the way I wrote this, it appears that the post-close interest goes away after January 21. The new rule takes effect for loans funded after that date; so if you pay off your your year-old FHA loan next March, you’ll still want to close escrow as close to the end of the month as possible.

Thanks for the heads-up, Doug!

By the way, this new rule came into being as a result of the Consumer Financial Protection Bureau’s rule limiting prepayment penalties.

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Posted in Down Payment Assistance, FHA mortgages, First Time Home Buyers, Inside mortgages, Mortgage insurance, Refinance | Tagged , , , , , , | 1 Comment

What Running Has Taught Me

Regular readers of this blog know that I had an epiphany of sorts two and a half years ago;

4:50.5 Mile run

Crossing the line with a 4:50.5 mile time. May, 1963

the deadly combination of high blood pressure and high cholesterol led to what doctors called “a minor stroke.” Technically, it was a Temporal Ischemic Attack (TIA): a couple of microscopic clots flicking switches deep in my brain, progressively shutting down the right side of my body. Thankfully, I got treatment in time, so there was no permanent damage. That experience caused me to take my health seriously. Most importantly, I began exercising regularly. I made it a point to walk for at least twenty minutes every day. Walking led to jogging, then running, then increasing my distance. After some backsliding, I committed wholeheartedly to my new routine in August of 2013.

The results have been measurable. First, as my fitness has improved, my resting heart rate has dropped from 72 to 46. Second, I have lost more than 35 pounds—and I was not what anyone could call overweight when I started. I now take half as much blood pressure medication as I did immediately after the stroke. The lower heart rate is a direct result of my higher level of fitness. The welcome weight loss comes from burning more calories than I consume. It’s a simple matter of math: 3,500 “extra” calories burned results in one pound of fat gone.

There have been some surprises along the way. I was a middle distance runner in high school (my best time in the mile run was 4.50.5), but I did not exercise regularly until two years ago. While getting started was a struggle, the journey has given rewards far beyond my expectations.

Getting started is hard. It gets easier—MUCH easier. Let’s be honest. It is no fun at the beginning. Gasping for breath after jogging slowly for a block is unpleasant. The brain says, “Stop this foolishness—right NOW!” The body is a co-conspirator. Your oxygen debt seems insurmountable; your lungs scream for relief. After a couple of torturous weeks, you realize that you are running a little longer before you have to walk. Then you are running for the whole 20 minutes. After a while, the time goes so quickly that you extend it to 30 minutes, then 40, and possibly more.

After the first mile, running feels amazing. You may have heard about the “runner’s high,” attributable to the body’s production of endorphins during strenuous exercise. Whether a daily run produces this chemical is in dispute, but I can tell you that most days, I feel a sense of well-being and mental clarity during most of my run. I learned that I didn’t have to run fast to get into this pleasant mental state. Most days, my pace is around 10 minutes per mile (6 MPH). Some people can walk nearly that fast. Still, the benefit is there. Definitely.

Habit is a powerful force. When I started, I knew I’d have to create a habit. Without it, my innate excuse mechanism—we all have it—would keep me on the couch. So I resolved to get out the door every morning, rain or shine, no excuses allowed, for at least 20 minutes. After two weeks, I no longer had to persuade myself. It had become a part of my daily routine. I began recording my runs (or walks) on my phone. There many apps available—most are free for the basic versions. I started with MapMyRun, then added Strava. Seeing each day’s run on the app’s calendar kept me motivated. To be honest, calling my first months’ activity “running” is a stretch. But it was a start.

Not all addictions are bad. I’ll admit it: I am addicted to this. On those rare occasions when I skip a day, I feel edgy and unsettled. A critical part of my day is missing. My body—and my mind—have come to require this. As addictions go, I am quite happy with this one.

I have learned to pay attention to what my body is telling me. Anthropologists tell us that our bodies are designed for running. After all, the early hunter-gatherers had to be fleet of foot to survive. Today, we tend to insulate ourselves from the outside world—and from our own interior space. You have only to watch the astounding number of people with ear buds firmly implanted to realize this. I’m not maligning that nice bit of technology that lets us listen to our tunes without any distraction from the outside world; I often run with my iPod cranked up. There are also times that I like to pay attention to the rhythm of my footsteps, the sound of my breathing, the rush of blood through my veins. I often find myself in a sort of meditative state when I run iPod-free. I come back from the run invigorated and renewed mentally, as well as physically.

I learn what I am capable of by failing. Running as a way of life often involves exploring our own limitations. How far can I run without stopping? How fast can I run a mile? Three miles? Twenty-six miles? The only way to learn is to make an attempt—and fail. One recent Sunday, I set out determined to extend my weekly “long” run from six miles to eight. The day was very hot. Even though I was carrying water, when I reached four miles, I simply could not run another step. I had allowed myself to become dehydrated because of the heat. I was drinking regularly, but it was not enough. Now I know, and can avoid the problem in the future. It was an important lesson.

Can we derive life lessons from a running lifestyle? Certainly. Success in work and life often demands that we push ourselves past where we thought our limits were, and sometimes we fall short of the mark. Those of us who sell for a living often have times where we don’t feel like making one more call in search of a new client or customer. Making that call when we don’t particularly want to is no different from pushing ourselves to run the last half mile when we are tired and sore.

Becoming a runner involved setting goals. It still does. At the beginning, it was modest: get out the door every morning for at least 20 minutes. I knew that the only thing standing in the way of that goal was my own lack of resolve. I knew the goal was attainable and completely within my grasp, subject only to my own determination. Today, my running goals are more ambitious: increasing my weekly distance to 30 miles from 20; shaving two minutes from my one-mile pace; running a marathon.

Running has taught me that I am capable of more than I first thought—not only in the physical sense of running longer distances at a faster pace, but also in the mental toughness and discipline that leads to success in business and in life. It has taught me that I can silence the yawping inner voice that insists, “You CAN’T do this!”

Running has taught me that, even in the face of occasional failure, I can do better. It has taught me that I can be better.

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Ditching Your Mortgage Insurance

Dollar HouseI have been interviewed recently by several reporters working on articles about mortgage insurance. Their questions made me realize that many consumers are still confused about this important financial tool.

I have written several articles about mortgage insurance myself, but it occurred to me that I should offer a concise explanation of what MI is, how it works and why you may be happy it exists.

Someone borrowing more than 80% of the value of a property presents a greater risk of default. The lender wants to be protected from the possibility of loss, so they will require that the borrower get a policy of mortgage insurance (MI). This limits the potential loss if the borrower defaults on the loan.

The cost of MI varies with the loan-to-value ratio (LTV) and your credit score. Insurance for a 90% loan will cost .44%, or $110/mo for a $300,000 loan if you have a FICO score of 740 or higher. A borrower with a 680 FICO will pay a higher rate: .62%, or $170/mo for the same loan.

The lender will let you drop the MI once the LTV reaches 80%. Different lenders have different procedures, but in most cases, you can order an exterior-only appraisal to confirm the present value (it will cost around $325). If you’ve made your payments on time for at least a year, the lender will agree to drop the MI if the LTV is 80% or lower.

The news is not quite as good for FHA loans. The Federal Housing Administration recently decided, in its infinite wisdom, that the MI (currently 1.35%) must remain on the loan over its entire life. If your property has appreciated to where your LTV is 80% or lower, you’ll have to refinance into a conventional loan to get rid of MI. Even though the rate may be higher than your present FHA loan, the overall cost may drop enough to justify making the change.

Even though mortgage insurance may seem to be an unwelcome cost that benefits only the lender, the fact is that it can help you save money. If your property appraised for a lower price than you had hoped for, paying MI for a year or two can help you take advantage of today’s lower rates. Just be aware of your property’s value as it appreciates—your Realtor® would be more than happy to keep you informed—and get it removed as soon as your LTV drops to 80%.

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